Published: Feb. 2, 2012

Would bankruptcy cure Detroitís ills?

Contact(s): Andy Henion Media Communications office: (517) 355-3294 cell: (517) 281-6949 Andy.Henion@cabs.msu.edu, Eric Scorsone Extension office: (517) 353-9460 scorsone@msu.edu

EAST LANSING, Mich. — Even if Detroit ends up filing for bankruptcy, it may not be the solution to the city’s long-running fiscal woes, according to a new report led by a Michigan State University economist.

Instead, a Chapter 9 municipal bankruptcy may simply serve as a wakeup call to bring city and union leaders and other stakeholders to the table in an attempt to fix the city’s deep financial problems, said Eric Scorsone, an MSU Extension specialist and faculty member in the Department of Agricultural, Food and Resource Economics.

Scorsone said the city of Vallejo, Calif., emerged from an expensive, drawn-out bankruptcy only to be saddled with many of the same financial issues that led to its Chapter 9 filing.

“Bankruptcy is meant to reset the financial course for municipalities, but the structural fiscal problems can remain,” said Scorsone, former senior economist at the Michigan Senate Fiscal Agency. “I’d be more inclined to call bankruptcy a wakeup call than a solution.”

Detroit’s city and union leaders are trying to reach agreement on wage and benefits concessions to help avoid a state-appointed emergency manager from taking control of the cash-strapped city.

Some experts have warned the city is headed for Chapter 9, which would be the first municipal bankruptcy in Michigan in more than 50 years. A bankruptcy could only occur if an emergency manager was appointed.

In the report, Scorsone and accountant Nicolette Bateson evaluate the potential effect of a bankruptcy on the Motor City. While not advocating for bankruptcy one way or the other, the study found there would be advantages and disadvantages to filing for Chapter 9.

Proponents argue that a bankruptcy judge – even more than an emergency manager – would have the authority to break contracts and lower the legacy costs of pensions and retiree health care.

Opponents argue a bankruptcy might take several years and Detroit can’t wait that long, as the city is running out of cash now, Scorsone said. In addition, the judge’s power is severely limited in a municipal case – unlike a corporate bankruptcy case – meaning the city’s structural problems may not get fixed.

A bankruptcy in Michigan’s largest city also could affect the bond rating of the state and other municipalities, making it harder for them to borrow money, Scorsone said.

Whatever route is taken, Scorsone said immediate action is needed to “mitigate decades of mounting structural fiscal imbalances in Detroit.”

“Inaction will only make the situation worse,” Scorsone said. “Swift action is needed to avoid a full-blown crisis for city government.”

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